Designing the Health Insurance Exchanges

I've said before that the Health Insurance Exchange is arguably the most important element of health-care reform. And I'm worried about it. Just like there's a strong and weak version of the public plan, there's a strong and weak version of the exchange. It's been hard to get people to care about the exchanges. So maybe this will help: The Health Insurance Exchange is where the public plan will live. And if the exchange doesn't survive, or thrive, then neither will the public plan.

The strong version is national, or at least regional. It's open to everyone: The unemployed, the self-employed, and any business, no matter the size, that wants to buy its workers in. There's risk adjustment to reduce the incentive for cherrypicking. And all this means that each exchange has many tens of millions of people, giving it tremendous advantages in scale, simplicity and standardization. With tens of millions of potential customers, insurers are eager to participate, and they will bid aggressively to ensure they're included in the market and compete aggressively to make sure they're successful within it. Over time, the combination of increased efficiencies and greater competition drive down costs in the exchange, which will lead more employers to use it, which will in turn give it more scale and bargaining power.

The weak version is state-based. It's open to only the unemployed, the self-employed and small businesses. Risk-adjustment, if it exists at all, is crude. With such a limited pool of applicants, insurers aren't driven to compete, and the efficiencies of scale and competition are minimal. It never really grows, and instead exists as a marginal policy to mop up those who aren't covered by employers.

Right now, the weak version is a lot likelier than the strong version. There are a couple of reasons for this. One is that there are tricky policy problems inherent in the exchange. The largest of these is adverse selection: If you open it to large employers, but the only large employers who join are those with aging and ill workforces, then costs will shoot up.

And then there are the political problems. A better exchange will attract more employers. And the more employers who join it, the more you'll hear opponents of reform darkly warn that "X million people will lose their current health insurance under the president's plan." That's not, as you might imagine, a strictly accurate way of explaining the situation: Employers choose our insurance now, and if they can get a better deal on insurance somewhere else, they will choose that. But it's still a concern for reformers, and a legitimate one.

But for all those difficulties, the better the exchanges work, the more we'll have actually reformed the health-care system. The weaker and smaller they are, the more we'll have just pumped extra money into the existing structure. The exchanges, in other words, are the key to reform. They're the key to regulating insurers and cutting down administrative costs. They're the key to productive competition and more choices for individuals. They're the key to the public plan. And they're getting a lot less attention then they deserve.

I don't agree with Ezra's statement that the argument, "...X million people will lose their current health insurance under the president's plan..." is a legitimate one. Employers can and do change insurers and coverages under our current health care system. In addition, with costs rising at such a tremendous clip, they're likely to continue to do so even more. The fact that employers would have more choices and are more likely to change from one plan to a more competitive plan within an exchange isn't a bug...it's a feature.

You keep heralding the "exchange" as the solution - but I still have many concerns about this approach:

1) I do not understand how this new exchange isn't just another layer of bureaucracy in a system toppling under the weight of admin fees.

2) The "successful" exchange seems predicated on the death of the employer-based insurance option - is that true? I simply don't understand why a large employer would go through an exchange to get insurance when they can go through brokers - what is different under the new plan versus how they do it today?!

If employers continue to supply coverage, there won't be this mass of individuals seeking out all those various plans - we'll instead have the self-insured and uninsured going up against the big groups - just like today.

If I'm wrong, please set me straight on this.

3) Are we getting rid of the employer health insurance tax credit? If so, sounds like we all may find out just how costly health care in America really is - if we are abandoning the large employer supplied health insurance. How do you think Americans will react to paying for their health insurance in full? Probably won't be pretty... particularly since most people haven't a clue as to the expense of it now.

4) How does the creation of an exchange control costs? Particularly if the way we treat patients in the private sector today is too fragmented to gain a handle on practice patterns or costs? Controlling costs is the central issue in health care today - if we are to remain competitive in the global economy.

In all the discussion of reform, it seems we are not at all addressing cost issues in the private sector - why things cost what they do - for healthy people, not just sick, old people on Medicare.

5) Do any of the health care reform plans look into reforming how we reimburse health care? Today, the reimbursement patterns seem heavily weighted toward testing, not necessarily to fostering the patient/doc relationship that is essential in maintaining health.

I'm most interested in the risk-adjustment policies designed to stop cherry-picking, as it seems like a pretty hard and really important thing to do. I wonder if anyone has considered Kerry's "Health Care Reinsurance" proposals from the 2004 campaign?

"The current health care reforms drafts . . .drive out the incentive to cream, while also making it illegal to deny coverage on the basis of a pre-existing condition. CMS would manage that risk-balancing process, and has apparently become quite good at it. The Netherlands does something similar, so successfully that insurers actually seek out diabetics to insure."